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Cycle Counting Exposes Inventory Ills

It offers a more up-to-date picture of stock currently on hand and can help managers identify and correct processes that need improvement.

John Mark McDougal | Jul 11, 2013

Cycle counting is a process designed to replace comprehensive annual inventories with smaller counts conducted on a continuous basis throughout the year. It can be conducted while normal business operations continue, eliminating the need for an annual shutdown.

While you do need a certain level of product/process complexity or volume to make cycle counting worthwhile, companies need not be large to benefit.

5 Top Benefits

Improved ability to fill orders: Cycle counting allows smaller batches of goods to be counted and allows counts of the same batches multiple times a year. Companies can decide, for example, to schedule six counts a year of their highest turnover items, reducing inventory variances in the ordering system and, in turn, reducing the number of purchase requests that must be placed on back-order.

Current information to manage the business: When inventory records are inaccurate, orders for extra supply often are placed to provide “padding” that insures goods will be there when needed. This excess inventory increases carrying costs and potentially increases the amount of obsolete stock on hand.

Faster recognition of breakdowns in shipping, receiving and inventory transfer transactions: This can reduce extra costs associated with expedited freight that is incurred to make up for time lost dealing with inaccurate inventory records.

Reduced disruption: Since only small batches are being counted at a time, there is no need to shut down operations for counting inventory. And since counting is done continuously, the process can be integrated into the regular workflow. Last, there is no need to hire and train temporary workers to do an annual inventory. Existing staff can cycle count.

Increased ability to reduce errors and theft: More frequent counting allows discrepancies to be discovered closer to the time they were caused. That in turn makes identification of those causes – and correcting them – easier and quicker, reducing the impact of errors. More frequent counting also helps detect theft more quickly so that countermeasures can be taken.

Getting started

Among the issues to address when establishing a plan:

Ensure software capabilities. Software should take a snapshot of inventory at the start of a cycle count and then allow adjustments based on what is found in the physical count. Tracking, accumulating and accounting for these adjustments is essential.

Define the cycle and segregate counting accordingly. There are a variety of ways to cycle your counting, depending on needs. For example, you could count two percent of your fastest moving stock each day. That means that if your inventory is turning once every three months, you are keeping pace with what's going in and coming out. Other items could be counted less frequently.

You might also choose, for example, to count all items of one type, regardless of where they are in your facility, or you could count all items in one location, regardless of type.

Determine error tolerance. Your tolerance for error may vary depending on the degree of demand for any given item. You also may want to adjust your error rates down after you've made progress identifying process errors and human mistakes, and corrected them.

Here's what's next:

Begin cycle counting on a test run basis while still doing one last “physical inventory.”

Gain auditor, bank and any other third-party buy-in.

Communicate with staff on the reasons for the change in inventory process and your expectations for results.

Define/assign roles for the inventory staff. To preserve separation of duties, have the counting staff report to the accounting department rather than the manager of the facility where the count is taking place.

Start counting.

Measure the results!

John Mark McDougal, CPA, is partner-in-charge – accounting and assurance services and lead partner – manufacturing/distribution industry, at LBMC. He can be reached at [email protected] or 615-309-2474.